Every year, during the tax season in Canada, you will see many people scrambling to pay their taxes at the last minute, or pay someone else to do them, like an accountant. Because of the stress this period may generate, there are some tax credits and deductions that many taxpayers might overlook or fail to realize they can benefit from. As a result, they will not make the most of their tax returns.
The fact is, people do not even know the subtle differences between tax credits and tax deductions, and they are often seen as the same thing. On the other hand, there are indeed some key differences between the two. In the article below you will find information that you can use when doing your taxes efficiently when the time comes.
What are the tax brackets?
Although this article is not a lesson on how to do your taxes, you should understand some aspects of the tax system generally, if and when you have trouble figuring out the differences between tax credits and tax deductions . Your tax bracket is based on the income you earn in a taxation year and the portion of that income that will be taxed by the federal and provincial governments. The higher the tax bracket, the more you pay taxes. If, for example, you earned $ 60,000 during the year, you will be taxed at a rate of 15% on the first $ 45,916, but at a rate of 20.5% (current rate of $ 45,916 $ 91,831) out of the remaining $ 14,084.
It is important to note here that most provincial tax rules are specific to each province. For example, the federal tax rates are the same in all provinces and, for 2017, start at 15% for the first $ 45,916 or less of taxable income. However, the provincial / territorial tax rate, say, in Ontario, is 5.05% on first income of $ 41,201 or less. To simplify matters, in this article, we will simply discuss tax credits and deductions for a better understanding.
One of the first differences between tax credits and tax deductions is related to your tax bracket. When a particular tax credit is approved, the taxpayer who has applied for a reduction will receive the same tax reduction, regardless of the tax bracket in which it is located. On the other hand, tax deductions depend on your tax bracket because the amount deducted is based on the net income of a taxpayer.
Other notable differences
In fact, there are some additional differences between tax credits and tax deductions that can be confusing to many taxpayers, especially when they try to file their taxes themselves rather than seeking the help of taxpayers. ‘a professional. Below you will find the main differences.
Refundable and non-refundable tax credits
A tax credit is one type of benefit you can claim, which will reduce the amount of income tax you owe the federal government for the year. The amount of tax reduced by this tax credit, whether this amount is equal to $ 100 or $ 1,000, is calculated based on the lowest tax bracket, or 15%, regardless of the tax bracket. taxation in which you find yourself. For example, you are entitled to a tax credit of $ 5,000. 15% of this amount of $ 5,000 equals $ 750. So you will need $ 750 less federal income tax this year.
You can also benefit from two types of tax credits:
- Non-Refundable Tax Credits – help reduce the amount of tax you owe. However, if your non-taxable tax credit is more than the taxes you owe. You will not receive the difference on your tax return. Some types of non-refundable tax credits include the spouse or common-law partner credit, medical expenses, public transit passes, charitable donations, and so on.
- Refundable Tax Credits – also reduce the amount you owe in taxes. However, if you claim them on your tax return, any refundable tax credit will give you the money you do not already owe in taxes. Certain types of refundable tax credits include GST / HST credits (Goods and Services Tax / Harmonized Sales Tax), Work Income Tax Benefit, Children’s Fitness Tax Credit etc.
A tax deduction reduces the amount of taxable income you must pay. For example, the RRSP. The more you contribute to your RRSP, the more you deduct the amount of your taxable income.
Let’s say that during the 2017 tax year, you earned up to the 15% tax bracket limit of $ 45,916. This means that the amount you owe for federal income tax this year will be $ 6,887.40. However, you managed to contribute $ 5,000 to your RRSP in the same year. This contribution will reduce your taxable income to $ 40,916. 15% of this amount equals $ 6,137.40. You will have saved $ 750 in federal taxes.
Deductions or credits?
In Canada, there are many types of deductions and federal, provincial and territorial tax credits and deductions that you can claim while doing your taxes. One of these deductions or credits may entitle you to a tax refund. However, you will withdraw more or less depending on your income generated on an annual basis. Whatever your income, it will certainly be beneficial for you to consider applying for this tax credit and deduction as soon as possible. In any case, you can contribute regularly to your RRSP to get a basic tax deduction. Once you have obtained a little more information, you can start claiming all the tax credits and deductions and make the most of your tax return.